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China's insurance ownership proposals seen blocking riskier use of premiums

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(Reuters) — Proposed ownership limits at Chinese insurance companies could effectively stop conglomerates such as China Evergrande Group and Baoneng Group from using their insurance units to help fund acquisitions and riskier investments.

The draft China Insurance Regulatory Commission's (CIRC) proposals, unveiled last week, would cap individual ownership limits in insurance companies at 33%, down from a previous limit of 51%.

Industry professionals say the regulator is looking to stop non-financial owners using insurance customers' premiums to make risky acquisitions or speculate on property and stocks, putting customers and the insurer at risk.

"As some of such non-insurance-related businesses and investments go wild, they weaken the risk-control capacity and solvency of some Chinese insurers and may further impair the safety and soundness of the entire insurance sector," said Clifford Chance's Beijing-based partner Tiecheng Yang.

Equity investments accounted for 15% to 20% of large insurers' assets as of end-June, up from 10% to 15% at the end of 2014, according to rating agency Fitch, and industry executives say smaller insurers have built up even bigger exposure.

The CIRC proposal, which is unlikely to apply to large, mostly state-backed insurers, will be implemented after consultation with the industry, and the regulator has not set a firm timeline for implementation.

Some Chinese companies, especially property developers, have been investing heavily in the insurance sector to access quick and cheap funds to fuel a buying and expansion spree in China and beyond.

That led to a bitter takeover battle by Evergrande and Baoneng for control of China Vanke Co Ltd., the mainland's biggest property company by sales.

Since late 2015, Baoneng has used a clutch of group units including majority-owned insurance arm Foresea Life to build up a 25% stake in Vanke and is now the largest shareholder in the company, whose shares have dropped 16 % in 2016. Evergrande units have amassed 14% in Vanke, as per its regulatory disclosure in November.

Evergrande Life Insurance has also been aggressively investing in stock markets in the last few months and currently has direct equity investments in about a dozen small, listed Chinese companies, a Reuters review of its investment portfolio showed. The review shows it is among the top 10 shareholders in firms ranging from a pipeline maker with a market value of $834 million to a building decorations company worth $4 billion.

If the draft rules are implemented, there would be no majority owner able to dictate such investments, the industry officials said.

"The CIRC is very serious about stamping down on these risky investment practices," said Sam Radwan, co-founder of consultant ENHANCE International, which works with CIRC and China's top insurers. "They will enforce the rules in cases where it's giving them headaches."

CIRC did not respond to Reuters request for comment. Evergrande declined to comment on the CIRC proposal, while calls to Baoneng's Foresea Life head office were not answered.

REGULATORY CONCERNS

Last month CIRC indicated its concern by suspending Evergrande Life from conducting stock market investments due to what it called its speculative, frequent, high-volume trading.

On the suspension, Evergrande told Reuters that the life insurance unit would improve its stock investment system and ensure its management of financial risks functions effectively.

CIRC also suspended Foresea Life last month from selling universal life products, and instructed the firm to "improve customer service, (and) strengthen risk monitoring and response to maintain company stability."

Universal life products, which are short-term investment products with death benefits, sometimes with high guaranteed returns, generate 90% of Foresea's premium income.

CIRC's latest proposal follows a slew of initiatives this year to curb risky practices in the insurance sector, the world's second largest, which have raised concerns about possible contagion risks to the financial system.

The proposal also includes provisions to stop insurers feeding premiums into their wealth management products, which, industry officials said, are aimed at curbing their short-term liabilities and easing pressure to generate higher returns.

That pressure has pushed insurers increasingly into non-standard assets that are considered riskier and less easily converted into cash when liquidity is tight.

A Reuters survey of the accounts of China's top five listed insurers in June showed their holding of assets other than shares, bonds and cash had more than quadrupled in five years to 984 billion yuan ($150 billion).

"The appeal of Chinese insurance companies is the ability to raise easy capital in the form of short to medium-term wealth management products," said Jonathan Ha, CEO of Red Pulse, a Shanghai-based markets research firm.

"The new rules would make it more troublesome (for insurers), however, and also stand as a strong indication from regulators that such practices are now being carefully scrutinized.”